Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity

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Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity by Raghuram G. Rajan and Luigi Zingales Crown Business * 2003 * 314 pages * $29.95

In an era of misguided attacks on capitalism, Saving Capitalism from the Capitalists has about the most promising beginning imaginable: "Capitalism, or more precisely, the free market system, is the most effective way to organize production and distribution that human beings have found." The authors-Raghuram Rajan (newly named as the International Monetary Fund's chief economist) and Luigi Zingales (of the University of Chicago's Graduate School of Business)-also recognize that capitalism is blamed for a host of ills, both by those who do not understand it and those with an agenda of deflecting blame or capturing the political apparatus for their own benefit.

Capitalism often serves as a scapegoat for economic distress because, the authors observe, "the forms of capitalism that are experienced in most countries are far from the ideal. They are a corrupted version of it in which vested interests prevent competition from playing its natural healthy role. Many of the accusations against capitalism . . . relate to the corrupted, uncompetitive systems that exist rather than a true free enterprise system."

Rajan and Zingales argue that once a government has been largely restrained from violating property rights and the institutions of capitalism have begun to develop, the greatest threat to the system comes from those who already have positions of economic power ("the incumbents"). With no interest in enabling competition that would erode their dominant market positions, they use their concentrated interests to control the rules in their favor. Those are the capitalists capitalism needs saving from.

Dominant domestic producers use their clout to create protectionist policies to control competition, particularly from those outside the country, who have little if any domestic political power. This is why the authors emphasize free international trade as a constraint on inefficient government restrictions to protect domestic incumbents. This problem is particularly troublesome in recessions, when the incumbents channel the anger of the distressed to achieve their protectionist ends through legislation and regulation, which can then persist for many years after the immediate crisis is over. (This persistence argument is so reminiscent of Robert Higgs's Crisis and Leviathan that I cannot understand its absence from the book's bibliography.)

The authors emphasize that it is even more important to keep incumbents, particularly in an underdeveloped financial system, from freezing out improved institutions and innovations; the denial of access to capital is the most general barrier to entry and competition. …